Southern Missouri Bancorp Earnings 2018-12-31

SMBC 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 smbc-10q103118.htm QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 2018

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2018

___	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-23406

Southern Missouri Bancorp, Inc.(Exact name of registrant as specified in its charter)

	Missouri		43-1665523
	(State or jurisdiction of incorporation)		(IRS employer id. no.)

2991 Oak Grove Road, Poplar Bluff, MO	63901
(Address of principal executive offices)	(Zip code)

(573) 778-1800Registrant's telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act)

Yes

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Class		Outstanding at February 8, 2019
Common Stock, Par Value $.01		9,322,209 Shares

SOUTHERN MISSOURI BANCORP, INC.

FORM 10-Q

INDEX

PART I.	Financial Information	PAGE NO.

Item 1.	Condensed Consolidated Financial Statements

	- Condensed Consolidated Balance Sheets	3

	- Condensed Consolidated Statements of Income	4

	- Condensed Consolidated Statements of Comprehensive Income	5

	- Condensed Consolidated Statements of Cash Flows	6

	- Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52

Item 4.	Controls and Procedures	54

PART II.	OTHER INFORMATION	55

Item 1.	Legal Proceedings	55

Item 1a.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3.	Defaults upon Senior Securities	55

Item 4.	Mine Safety Disclosures	55

Item 5.	Other Information	55

Item 6.	Exhibits	56

	- Signature Page	57

	- Certifications

PART I: Item 1: Condensed Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2018 AND JUNE 30, 2018

(dollars in thousands)	December 31, 2018			June 30, 2018
	(unaudited)

Assets
Cash and cash equivalents	$	38,384		$	26,326
Interest-bearing time deposits		1,711			1,953
Available for sale securities		197,872			146,325
Stock in FHLB of Des Moines		9,339			5,661
Stock in Federal Reserve Bank of St. Louis		3,566			3,566
Loans receivable, net of allowance for loan losses of $19,023 and $18,214 at December 31, 2018 and June 30, 2018, respectively		1,801,477			1,563,380
Accrued interest receivable		10,801			7,992
Premises and equipment, net		62,253			54,832
Bank owned life insurance – cash surrender value		37,845			37,547
Goodwill		14,089			13,078
Other intangible assets, net		10,340			6,918
Prepaid expenses and other assets		18,602			18,537
Total assets	$	2,206,279		$	1,886,115

Liabilities and Stockholders' Equity
Deposits	$	1,796,006		$	1,579,902
Securities sold under agreements to repurchase		4,425			3,267
Advances from FHLB of Des Moines		155,765			76,652
Note payable		3,000			3,000
Accounts payable and other liabilities		6,392			6,449
Accrued interest payable		1,668			1,206
Subordinated debt		14,994			14,945
Total liabilities		1,982,250			1,685,421

Common stock, $.01 par value; 25,000,000 and 12,000,000 shares authorized; 9,313,109 and 8,996,584 shares issued, respectively, at December 31, 2018 and June 30, 2018		93			90
Additional paid-in capital		94,293			83,413
Retained earnings		131,451			119,536
Accumulated other comprehensive income (loss)		(1,808	)		(2,345	)
Total stockholders' equity		224,029			200,694
Total liabilities and stockholders' equity	$	2,206,279		$	1,886,115

See Notes to Condensed Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND SIX- MONTH PERIODS ENDED DECEMBER 31, 2018 AND 2017 (Unaudited)

	Three months ended				Six months ended
	December 31,				December 31,
	2018		2017		2018		2017
(dollars in thousands except per share data)

INTEREST INCOME:
Loans	$	22,785	$	18,236	$	43,701	$	35,692
Investment securities		738		558		1,255		1,087
Mortgage-backed securities		649		426		1,232		843
Other interest-earning assets		35		11		61		20
Total interest income		24,207		19,231		46,249		37,642
INTEREST EXPENSE:
Deposits		4,925		3,025		8,934		5,887
Securities sold under agreements to repurchase		8		8		16		22
Advances from FHLB of Des Moines		932		284		1,531		510
Note payable		48		29		83		57
Subordinated debt		226		182		450		360
Total interest expense		6,139		3,528		11,014		6,836
NET INTEREST INCOME		18,068		15,703		35,235		30,806
PROVISION FOR LOAN LOSSES		314		642		995		1,511
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		17,754		15,061		34,240		29,295
NONINTEREST INCOME:
Deposit account charges and related fees		1,286		1,162		2,510		2,331
Bank card interchange income		1,182		905		2,245		1,773
Loan late charges		120		106		214		219
Loan servicing fees		154		147		312		327
Other loan fees		377		242		714		630
Net realized gains on sale of loans		141		219		320		422
Net realized gains on sale of AFS securities		-		37		-		37
Earnings on bank owned life insurance		594		234		840		466
Other income		200		122		328		241
Total noninterest income		4,054		3,174		7,483		6,446
NONINTEREST EXPENSE:
Compensation and benefits		6,445		5,424		12,492		11,356
Occupancy and equipment, net		2,671		2,379		5,141		4,684
Deposit insurance premiums		145		151		283		270
Legal and professional fees		254		293		510		545
Advertising		278		364		593		602
Postage and office supplies		193		177		345		374
Intangible amortization		374		348		770		696
Bank card network expense		496		373		991		740
Other operating expense		1,696		1,010		2,875		2,006
Total noninterest expense		12,552		10,519		24,000		21,273
INCOME BEFORE INCOME TAXES		9,256		7,716		17,723		14,468
INCOME TAXES		1,802		2,546		3,469		4,435
NET INCOME	$	7,454	$	5,170	$	14,254	$	10,033

Basic earnings per common share	$	0.82	$	0.60	$	1.57	$	1.17
Diluted earnings per common share	$	0.81	$	0.60	$	1.57	$	1.16
Dividends per common share	$	0.13	$	0.11	$	0.26	$	0.22

See Notes to Condensed Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND SIX- MONTH PERIODS ENDED DECEMBER 31, 2018 AND 2017 (Unaudited)

	Three months ended						Six months ended
	December 31,						December 31,
	2018			2017			2018			2017
(dollars in thousands)

Net income	$	7,454		$	5,170		$	14,254		$	10,033
Other comprehensive income:
Unrealized gains (losses) on securities available-for-sale		1,144			(1,360	)		766			(1,338	)
Less: reclassification adjustment for realized gains included in net income		-			37			-			37
Unrealized gains (losses) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income		-			40			-			52
Tax benefit (expense)		(320	)		428			(229	)		416
Total other comprehensive income (loss)		824			(929	)		537			(907	)
Comprehensive income	$	8,278		$	4,241		$	14,791		$	9,126

See Notes to Condensed Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 2018 AND 2017 (Unaudited)

	Six months ended
	December 31,
(dollars in thousands)	2018			2017

Cash Flows From Operating Activities:
Net Income	$	14,254		$	10,033
Items not requiring (providing) cash:
Depreciation		1,614			1,559
Loss (gain) on disposal of fixed assets		8			(12	)
Stock option and stock grant expense		126			144
Loss (gain) on sale/write-down of REO		132			(71	)
Amortization of intangible assets		770			696
Accretion of purchase accounting adjustments		(1,629	)		(820	)
Increase in cash surrender value of bank owned life insurance (BOLI)		(840	)		(466	)
Provision for loan losses		995			1,511
Gains realized on sale of AFS securities		-			(37	)
Net amortization of premiums and discounts on securities		452			510
Originations of loans held for sale		(14,689	)		(11,605	)
Proceeds from sales of loans held for sale		14,934			11,199
Gain on sales of loans held for sale		(320	)		(422	)
Changes in:
Accrued interest receivable		(1,071	)		(2,290	)
Prepaid expenses and other assets		2,540			4,938
Accounts payable and other liabilities		(512	)		(3,657	)
Deferred income taxes		(188	)		142
Accrued interest payable		364			162
Net cash provided by operating activities		16,940			11,514
Cash flows from investing activities:
Net increase in loans		(94,716	)		(56,501	)
Net change in interest-bearing deposits		242			249
Proceeds from maturities of available for sale securities		13,650			7,943
Proceeds from sales of available for sale securities		-			7,303
Net purchases of Federal Home Loan Bank stock		(2,617	)		(764	)
Net purchases of Federal Reserve Bank of St. Louis stock		-			(836	)
Purchases of available-for-sale securities		(10,017	)		(20,978	)
Purchases of premises and equipment		(5,381	)		(1,714	)
Net cash paid for acquisition		(8,377	)		-
Investments in state & federal tax credits		(231	)		(4,748	)
Proceeds from sale of fixed assets		-			854
Proceeds from sale of foreclosed assets		1,753			752
Proceeds from BOLI claim		544			-
Net cash used in investing activities		(105,150	)		(68,440	)
Cash flows from financing activities:
Net (decrease) increase in demand deposits and savings accounts		(63,690	)		73,299
Net increase (decrease) in certificates of deposits		109,146			(19,914	)
Net increase (decrease) in securities sold under agreements to repurchase		1,158			(6,515	)
Proceeds from Federal Home Loan Bank advances		327,500			1,186,400
Repayments of Federal Home Loan Bank advances		(267,107	)		(1,170,000	)
Repayments of long term debt		(4,400	)		-
Common stock issued expense		-			(4	)
Dividends paid on common stock		(2,339	)		(1,890	)
Net cash provided by financing activities		100,268			61,376
Increase in cash and cash equivalents		12,058			4,450
Cash and cash equivalents at beginning of period		26,326			30,786
Cash and cash equivalents at end of period	$	38,384		$	35,236

Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Conversion of loans to foreclosed real estate	$	1,623		$	1,272
Conversion of loans to repossessed assets		20			34

The Company purchased all of the capital stock of Gideon for $22,028 on November 21, 2018.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired		216,772			-
Less: common stock issued		10,757			-
Cash paid for the capital stock		11,271			-
Liabilities assumed		194,744			-

Cash paid during the period for:
Interest (net of interest credited)	$	2,539		$	1,749
Income taxes		795			1,080

See Notes to Condensed Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet of the Company as of June 30, 2018, has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three- and six- month periods ended December 31, 2018, are not necessarily indicative of the results that may be expected for the entire fiscal year. For additional information, refer to the audited consolidated financial statements included in the Company’s June 30, 2018, Form 10-K, which was filed with the SEC.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Southern Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 2: Organization and Summary of Significant Accounting Policies

Organization. Southern Missouri Bancorp, Inc., a Missouri corporation (the Company) was organized in 1994 and is the parent company of Southern Bank (the Bank). Substantially all of the Company’s consolidated revenues are derived from the operations of the Bank, and the Bank represents substantially all of the Company’s consolidated assets and liabilities. SB Real Estate Investments, LLC is a wholly-owned subsidiary of the Bank formed to hold Southern Bank Real Estate Investments, LLC. Southern Bank Real Estate Investments, LLC is a REIT which is controlled by SB Real Estate Investments, LLC, but which has other preferred shareholders in order to meet the requirements to be a REIT. At December 31, 2018, assets of the REIT were approximately $608 million, and consisted primarily of loan participations acquired from the Bank.

The Bank is primarily engaged in providing a full range of banking and financial services to individuals and corporate customers in its market areas. The Bank and Company are subject to competition from other financial institutions. The Bank and Company are subject to regulation by certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Basis of Financial Statement Presentation. The financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In the normal course of business, the Company encounters two significant types of risk: economic and regulatory. Economic risk is comprised of interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities reprice on a different basis than its interest-earning assets. Credit risk is the risk of default on the Company’s investment or loan portfolios resulting from the borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of the investment portfolio, collateral underlying loans receivable, and the value of the Company’s investments in real estate.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, estimated fair values of purchased loans, other-than-temporary impairments (OTTI), and fair value of financial instruments.

Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents includes cash, due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $1.2 million and $3.4 million at December 31, and June 30, 2018, respectively. The deposits are held in various commercial banks in amounts not exceeding the FDIC’s deposit insurance limits, as well as at the Federal Reserve and the Federal Home Loan Bank of Des Moines.

Interest-bearing Time Deposits. Interest bearing time deposits in banks mature within seven years and are carried at cost.

Available for Sale Securities. Available for sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses, net of tax, are reported in accumulated other comprehensive income (loss), a component of stockholders’ equity. All securities have been classified as available for sale.

Premiums and discounts on debt securities are amortized or accreted as adjustments to income over the estimated life of the security using the level yield method. Realized gains or losses on the sale of securities is based on the specific identification method. The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

The Company does not invest in collateralized mortgage obligations that are considered high risk.

When the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. As a result of this guidance, the Company’s consolidated balance sheet as of the dates presented reflects the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive loss. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.

Federal Home Loan Bank and Federal Reserve Bank Stock. The Bank is a member of the Federal Home Loan Bank (FHLB) system, and the Federal Reserve Bank of St. Louis. Capital stock of the FHLB and the Federal Reserve is a required investment based upon a predetermined formula and is carried at cost.

Loans. Loans are generally stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees.

Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest on loans is discontinued when, in management’s judgment, the collectability of interest or principal in the normal course of business is doubtful. The Company complies with regulatory guidance which indicates that loans should be placed in nonaccrual status when 90 days past due, unless the loan is both well-secured and in the process of collection. A loan that is “in the process of collection” may be subject to legal action or, in appropriate circumstances, through other collection efforts reasonably expected to result in repayment or restoration to current status in the near future. A loan is considered delinquent when a payment has not been made by the contractual due date. Interest income previously accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Cash receipts on a nonaccrual loan are applied to principal and interest in accordance with its contractual terms unless full payment of principal is not expected, in which case cash receipts, whether designated as principal or interest, are applied as a reduction of the carrying value of the loan. A nonaccrual loan is generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured, and a consistent record of performance has been demonstrated.

The allowance for losses on loans represents management’s best estimate of losses probable in the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries. Loans are charged off in the period deemed uncollectible, based on management’s analysis of expected cash flows (for non-collateral dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries of loans previously charged off, if any, are credited to the allowance when received. The provision for losses on loans is determined based on management’s assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.

Loans are considered impaired if, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. Valuation allowances are established for collateral-dependent impaired loans for the difference between the loan amount and fair value of collateral less estimated selling costs. For impaired loans that are not collateral dependent, a valuation allowance is established for the difference between the loan amount and the present value of expected future cash flows discounted at the historical effective interest rate or the observable market price of the loan. Impairment losses are recognized through an increase in the required allowance for loan losses. Cash receipts on loans deemed impaired are recorded based on the loan’s separate status as a nonaccrual loan or an accrual status loan.

Some loans are accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. For these loans (“purchased credit impaired loans”), the Company recorded a fair value discount and began carrying them at book value less their face amount (see Note 4). For these loans, we determined the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”), and estimated the amount and timing of undiscounted expected principal and interest payments, including expected prepayments (the “undiscounted expected cash flows”). Under acquired impaired loan accounting, the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference is an estimate of the loss exposure of principal and interest related to the purchased credit impaired loans, and the amount is subject to change over time based on the performance of the loans. The carrying value of purchased credit impaired loans is initially determined as the discounted expected cash flows. The excess of expected cash flows at acquisition over the initial fair value of the purchased credit impaired loans is referred to as the “accretable yield” and is recorded as interest income over the estimated life of the acquired loans using the level-yield method, if the timing and amount of the future cash flows is reasonably estimable. The carrying value of purchased credit impaired loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income. Subsequent to acquisition, the Company evaluates the purchased credit impaired loans on a quarterly basis. Increases in expected cash flows compared to those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in expected cash flows compared to those previously estimated decrease the accretable yield and may result in the establishment of an allowance for loan losses and a provision for loan losses. Purchased credit impaired loans are generally considered accruing and performing loans, as the loans accrete interest income over the estimated life of the loan when expected cash flows are reasonably estimable. Accordingly, purchased credit impaired loans that are contractually past due are still considered to be accruing and performing as long as there is an expectation that the estimated cash flows will be received. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans.

Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans.

Foreclosed Real Estate. Real estate acquired by foreclosure or by deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs. Costs for development and improvement of the property are capitalized.

Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value, less estimated selling costs.

Loans to facilitate the sale of real estate acquired in foreclosure are discounted if made at less than market rates. Discounts are amortized over the fixed interest period of each loan using the interest method.

Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation and include expenditures for major betterments and renewals. Maintenance, repairs, and minor renewals are expensed as incurred. When property is retired or sold, the retired asset and related accumulated depreciation are removed from the accounts and the resulting gain or loss taken into income. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment loss recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.

Depreciation is computed by use of straight-line and accelerated methods over the estimated useful lives of the assets. Estimated lives are generally seven to forty years for premises, three to seven years for equipment, and three years for software.

Bank Owned Life Insurance. Bank owned life insurance policies are reflected in the consolidated balance sheets at the estimated cash surrender value. Changes in the cash surrender value of these policies, as well as a portion of the insurance proceeds received, are recorded in noninterest income in the consolidated statements of income.

Goodwill. The Company’s goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.

Intangible Assets. The Company’s intangible assets at December 31, 2018 included gross core deposit intangibles of $14.7 million with $6.0 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and FHLB mortgage servicing rights of $1.6 million. At June 30, 2018, the Company’s intangible assets included gross core deposit intangibles of $10.6 million with $5.2 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and FHLB mortgage servicing rights of $1.5 million. The Company’s core deposit intangible assets are being amortized using the straight line method, over periods ranging from five to seven years, with amortization expense expected to be approximately $902,000 in the remainder of fiscal 2019, $1.8 million in fiscal 2020, $1.3 million in fiscal 2021, $1.3 million in fiscal 2022, $1.3 million in fiscal 2023, and $2.2 million thereafter.

Income Taxes. The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company files consolidated income tax returns with its subsidiaries.

Incentive Plan. The Company accounts for its Management and Recognition Plan (MRP) and Equity Incentive Plan (EIP) in accordance with ASC 718, “Share-Based Payment.” Compensation expense is based on the market price of the Company’s stock on the date the shares are granted and is recorded over the vesting period. The difference between the aggregate purchase price and the fair value on the date the shares are considered earned represents a tax benefit to the Company that is recorded as an adjustment to income tax expense.

Outside Directors’ Retirement. The Bank has entered into a retirement agreement with most outside directors since April 1994. The directors’ retirement agreements provide that non-employee directors shall receive, upon termination of service on the Board on or after age 60, other than termination for cause, a benefit in equal annual installments over a five year period. The benefit will be based upon the product of the participant’s vesting percentage and the total Board fees paid to the participant during the calendar year preceding termination of service on the Board. The vesting percentage shall be determined based upon the participant’s years of service on the Board, whether before or after the reorganization date.

In the event that the participant dies before collecting any or all of the benefits, the Bank shall pay the participant’s beneficiary. No benefits shall be payable to anyone other than the beneficiary, and benefits shall terminate on the death of the beneficiary.

Stock Options. Compensation cost is measured based on the grant-date fair value of the equity instruments issued, and recognized over the vesting period during which an employee provides service in exchange for the award.

Earnings Per Share. Basic earnings per share available to common stockholders is computed using the weighted-average number of common shares outstanding. Diluted earnings per share available to common stockholders includes the effect of all weighted-average dilutive potential common shares (stock options) outstanding during each period.

Comprehensive Income. Comprehensive income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income, and changes in the funded status of defined benefit pension plans.

Transfers Between Fair Value Hierarchy Levels. Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period ending date.

The following paragraphs summarize the impact of new accounting pronouncements:

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for certain removed and modified disclosures, and is not expected to have a significant impact on our financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) are recorded. This standard is effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt ASU 2018-02 and, as a result, reclassified $65,497 from accumulated other comprehensive income to retained earnings as of December 31, 2017.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Subtopic 718): Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Under the new guidance, an entity should account for the effects of a modification unless all of the following are the same immediately before and after the change: (1) the fair value of the modified award, (2) the vesting conditions of the modified award, and (3) the classification of the modified award as either an equity or liability instrument. ASU 2017-09 was effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied prospectively to awards modified on or after the adoption date. The adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash payments. The Update provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows, with the objective of reducing the diversity in practice. The Update addresses eight specific cash flow issues. For public companies, the ASU was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied retrospectively. There has been no material impact on the Company’s consolidated financial statements due to the adoption of this standard in the first quarter of fiscal 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The Update amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The Update affects loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public companies, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is available beginning after December 15, 2018, including interim periods within those fiscal years. Adoption will be applied on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings. Management is evaluating the impact, if any, this new guidance will have on the Company’s consolidated financial statements, but cannot yet reasonably estimate the impact of adoption. The Company formed a working group of key personnel responsible for the allowance for loan losses estimate and initiated its evaluation of the data and systems requirements of adoption of the Update. The group determined that purchasing third party software would be the most effective method to comply with the requirements, and evaluated several outside vendors. The group provided a recommendation to purchase Sageworks software, which was approved by the Board, and purchased in June 2018. Loan data files as of June 30, 2018 were imported into the testing environment within the Sageworks software, and sample testing was completed. Loan data files as of September 30, 2018 and December 31, 2018 were imported into the live environment, ALLL calculations were performed under the incurred loss model and results were compared to the Bank’s excel calculations. CECL model training was attended during the second quarter of fiscal 2019, with a goal to run parallel calculations shortly thereafter.

In February 2016, the FASB issued ASU 2016-02, “Leases,” to revise the accounting related to lease accounting. Under the new guidance, a lessee is required to record a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Adoption of the standard requires the use of a modified retrospective transition approach for all periods presented at the time of adoption. Management is evaluating the impact of the new guidance, but does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” to generally require equity investments be measured at fair value with changes in fair value recognized in net income, simplify the impairment assessment of equity investments without readily-determinable fair value, and change disclosure and presentation requirements regarding financial instruments and other comprehensive income, and clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10). The amendments in ASU 2018-03 make technical corrections to certain aspects of ASU 2016-01 on recognition of financial assets and financial liabilities. ASU 2016-01 became effective for the Company in the first quarter of fiscal 2019 and continues to have no material impact on the Company’s consolidated financial statements.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). The guidance in ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify two aspects of Topic 606- performance obligations and the licensing implementation guidance. Neither of the two updates changed the core principle of the guidance in Topic 606. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), to provide narrow-scope improvements and practical expedients to ASU 2015-14. ASU 2015-04 became effective for the Company in the first quarter of fiscal 2019 and continues to have no material change to our accounting for revenue because the majority of our financial instruments are not within the scope of Topic 606.

Note 3: Securities

The amortized cost, gross unrealized gains, gross unrealized losses, and approximate fair value of securities available for sale consisted of the following:

	December 31, 2018
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(dollars in thousands)	Cost		Gains		Losses			Value

Investment and mortgage backed securities:
U.S. government-sponsored enterprises (GSEs)	$	46,140	$	164	$	(114	)	$	46,190
State and political subdivisions		50,162		295		(397	)		50,060
Other securities		5,185		31		(157	)		5,059
Mortgage-backed GSE residential		98,661		143		(2,241	)		96,563
Total investments and mortgage-backed securities	$	200,148	$	633	$	(2,909	)	$	197,872

	June 30, 2018
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(dollars in thousands)	Cost		Gains		Losses			Value

Investment and mortgage backed securities:
U.S. government-sponsored enterprises (GSEs)	$	9,513	$	-	$	(128	)	$	9,385
State and political subdivisions		41,862		230		(480	)		41,612
Other securities		5,284		61		(193	)		5,152
Mortgage-backed GSE residential		92,708		1		(2,533	)		90,176
Total investments and mortgage-backed securities	$	149,367	$	292	$	(3,334	)	$	146,325

The amortized cost and estimated fair value of investment and mortgage-backed securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	December 31, 2018
	Amortized		Estimated
(dollars in thousands)	Cost		Fair Value
Within one year	$	16,524	$	16,510
After one year but less than five years		41,220		41,241
After five years but less than ten years		25,014		24,970
After ten years		18,729		18,588
Total investment securities		101,487		101,309
Mortgage-backed securities		98,661		96,563
Total investments and mortgage-backed securities	$	200,148	$	197,872

The carrying value of investment and mortgage-backed securities pledged as collateral to secure public deposits and securities sold under agreements to repurchase amounted to $146.7 million at December 31, 2018 and $124.2 million at June 30, 2018. The securities pledged consist of marketable securities, including $19.7 million and $8.4 million of U.S. Government and Federal Agency Obligations, $41.2 million and $39.8 million of Mortgage-Backed Securities, $49.9 million and $41.5 million of Collateralized Mortgage Obligations, $35.7 million and $34.2 million of State and Political Subdivisions Obligations, and $200,000 and $300,000 of Other Securities at December 31 and June 30, 2018, respectively.

Gains of $51,452 were recognized from sales of available-for-sale securities in each of the three- and six- month periods ended December 31, 2017. Losses of $14,345 were recognized from sales of available-for-sale securities in each of the three- and six- month periods ended December 31, 2017. There were no sales of available-for-sale securities in the three- and six- month periods ended December 31, 2018.

The following tables show our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31 and June 30, 2018:

	December 31, 2018
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
(dollars in thousands)
U.S. government-sponsored enterprises (GSEs)	$	3,843	$	17	$	7,381	$	97	$	11,224	$	114
Obligations of state and political subdivisions		4,516		27		19,194		370		23,710		397
Other securities		-		-		1,033		157		1,033		157
Mortgage-backed securities		23,207		321		58,839		1,920		82,046		2,241
Total investments and mortgage-backed securities	$	31,566	$	365	$	86,447	$	2,544	$	118,013	$	2,909

	June 30, 2018
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
(dollars in thousands)
U.S. government-sponsored enterprises (GSEs)	$	5,957	$	58	$	3,427	$	70	$	9,384	$	128
Obligations of state and political subdivisions		14,861		224		8,526		256		23,387		480
Other securities		982		10		1,109		183		2,091		193
Mortgage-backed securities		65,863		1,513		24,187		1,020		90,050		2,533
Total investments and mortgage-backed securities	$	87,663	$	1,805	$	37,249	$	1,529	$	124,912	$	3,334

Other securities. At December 31, 2018, there were two pooled trust preferred securities with an estimated fair value of $820,000 and unrealized losses of $152,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the pooled trust preferred securities and a reduced demand for these securities, and concerns regarding the financial institutions that issued the underlying trust preferred securities. Rules adopted by the federal banking agencies in December 2013 to implement Section 619 of the Dodd-Frank Act (the “Volcker Rule”) generally prohibit banking entities from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The pooled trust preferred securities owned by the Company were included in a January 2014 listing of securities which the agencies considered to be grandfathered with regard to these prohibitions; as such, banking entities are permitted to retain their interest in these securities, provided the interest was acquired on or before December 10, 2013, unless acquired pursuant to a merger or acquisition.

The December 31, 2018, cash flow analysis for these two securities indicated it is probable the Company will receive all contracted principal and related interest projected. The cash flow analysis used in making this determination was based on anticipated default, recovery, and prepayment rates, and the resulting cash flows were discounted based on the yield spread anticipated at the time the securities were purchased. Other inputs include the actual collateral attributes, which include credit ratings and other performance indicators of the underlying financial institutions, including profitability, capital ratios, and asset quality. Assumptions for these two securities included prepayments averaging 1.4 percent, annually, annual defaults averaging 69 basis points, and a recovery rate averaging 7.0 percent of gross defaults, lagged two years.

One of these two securities has continued to receive cash interest payments in full since our purchase; the other security received principal-in-kind (PIK), in lieu of cash interest, for a period of time following the recession and financial crisis which began in 2008, but resumed cash interest payments during fiscal 2014. Our cash flow analysis indicates that cash interest payments are expected to continue for the securities. Because the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2018.

The Company does not believe any other individual unrealized loss as of December 31, 2018, represents OTTI. However, the Company could be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any required OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.

Credit losses recognized on investments. During fiscal 2009, the Company adopted ASC 820, formerly FASB Staff Position 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The following table provides information about the trust preferred security for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the years ended December 31, 2018 and 2017. The trust preferred security with a credit loss at December 31, 2017 was sold later in the fiscal year ended June 30, 2018.

	Accumulated Credit Losses
	Six-Month Period Ended
(dollars in thousands)	December 31,
	2018		2017
Credit losses on debt securities held
Beginning of period	$	-	$	340
Additions related to OTTI losses not previously recognized		-		-
Reductions due to sales		-		-
Reductions due to change in intent or likelihood of sale		-		-
Additions related to increases in previously-recognized OTTI losses		-		-
Reductions due to increases in expected cash flows		-		(6	)
End of period	$	-	$	334

Note 4: Loans and Allowance for Loan Losses

Classes of loans are summarized as follows:

(dollars in thousands)	December 31, 2018			June 30, 2018
Real Estate Loans:
Residential	$	480,227		$	450,919
Construction		116,576			112,718
Commercial		837,917			704,647
Consumer loans		86,920			78,571
Commercial loans		345,803			281,272
		1,867,443			1,628,127
Loans in process		(46,940	)		(46,533	)
Deferred loan fees, net		(3	)		-
Allowance for loan losses		(19,023	)		(18,214	)
Total loans	$	1,801,477		$	1,563,380

The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. The Company has also occasionally purchased loan participation interests originated by other lenders and secured by properties generally located in the states of Missouri and Arkansas.

Residential Mortgage Lending. The Company actively originates loans for the acquisition or refinance of one- to four-family residences. This category includes both fixed-rate and adjustable-rate mortgage (“ARM”) loans amortizing over periods of up to 30 years, and the properties securing such loans may be owner-occupied or non-owner-occupied. Single-family residential loans do not generally exceed 90% of the lower of the appraised value or purchase price of the secured property. Substantially all of the one- to four-family residential mortgage originations in the Company’s portfolio are located within the Company’s primary lending area.

The Company also originates loans secured by multi-family residential properties that are often located outside the Company’s primary lending area but made to borrowers who operate within the primary market area. The majority of the multi-family residential loans that are originated by the Bank are amortized over periods generally up to 25 years, with balloon maturities typically up to ten years. Both fixed and adjustable interest rates are offered and it is typical for the Company to include an interest rate “floor” and “ceiling” in the loan agreement. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property.

Commercial Real Estate Lending. The Company actively originates loans secured by commercial real estate including land (improved, unimproved, and farmland), strip shopping centers, retail establishments and other businesses. These properties are typically owned and operated by borrowers headquartered within the Company’s primary lending area, however, the property may be located outside our primary lending area.

Most commercial real estate loans originated by the Company generally are based on amortization schedules of up to 25 years with monthly principal and interest payments. Generally, the interest rate received on these loans is fixed for a maturity for up to seven years, with a balloon payment due at maturity. Alternatively, for some loans, the interest rate adjusts at least annually after an initial period up to seven years. The Company typically includes an interest rate “floor” in the loan agreement. Generally, improved commercial real estate loan amounts do not exceed 80% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio.

Construction Lending. The Company originates real estate loans secured by property or land that is under construction or development. Construction loans originated by the Company are generally secured by mortgage loans for the construction of owner occupied residential real estate or to finance speculative construction secured by residential real estate, land development, or owner-operated or non-owner occupied commercial real estate. During construction, these loans typically require monthly interest-only payments and have maturities ranging from six to twelve months. Once construction is completed, loans may be converted to permanent status with monthly payments using amortization schedules of up to 30 years on residential and generally up to 25 years on commercial real estate.

While the Company typically utilizes maturity periods ranging from 6 to 12 months to closely monitor the inherent risks associated with construction loans for these loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately eight months. During construction, loans typically require monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically obtains interim inspections completed by an independent third party. This monitoring further allows the Company opportunity to assess risk. At December 31, 2018, construction loans outstanding included 58 loans, totaling $13.3 million, for which a modification had been agreed to. At June 30, 2018, construction loans outstanding included 72 loans, totaling $12.5 million, for which a modification had been agreed to. All modifications were solely for the purpose of extending the maturity date due to conditions described above. None of these modifications were executed due to financial difficulty on the part of the borrower and, therefore, were not accounted for as TDRs.

Consumer Lending. The Company offers a variety of secured consumer loans, including home equity, direct and indirect automobile loans, second mortgages, mobile home loans and loans secured by deposits. The Company originates substantially all of its consumer loans in its primary lending area. Usually, consumer loans are originated with fixed rates for terms of up to five years, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest and are for a period of ten years.

Home equity lines of credit (HELOCs) are secured with a deed of trust and are issued up to 100% of the appraised or assessed value of the property securing the line of credit, less the outstanding balance on the first mortgage and are typically issued for a term of ten years. Interest rates on HELOCs are generally adjustable. Interest rates are based upon the loan-to-value ratio of the property with better rates given to borrowers with more equity.

Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 60 months for new and used vehicles. Loans secured by automobiles have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle.

Commercial Business Lending. The Company’s commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory, equipment and operating lines of credit, including agricultural production and equipment loans. The Company offers both fixed and adjustable rate commercial business loans. Generally, commercial loans secured by fixed assets are amortized over periods up to five years, while commercial operating lines of credit or agricultural production lines are generally for a one year period.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment and impairment methods as of December 31 and June 30, 2018, and activity in the allowance for loan losses for the three- and six- month periods ended December 31, 2018 and 2017:

	At period end and for the six months ended December 31, 2018
	Residential			Construction		Commercial
(dollars in thousands)	Real Estate			Real Estate		Real Estate			Consumer			Commercial			Total
Allowance for loan losses:
Balance, beginning of period	$	3,226		$	1,097	$	8,793		$	902		$	4,196		$	18,214
Provision charged to expense		415			94		319			80			87			995
Losses charged off		(9	)		-		(120	)		(20	)		(47	)		(196	)
Recoveries		1			-		3			5			1			10
Balance, end of period	$	3,633		$	1,191	$	8,995		$	967		$	4,237		$	19,023
Ending Balance: individually evaluated for impairment	$	-		$	-	$	-		$	-		$	-		$	-
Ending Balance: collectively evaluated for impairment	$	3,633		$	1,191	$	8,995		$	967		$	4,237		$	19,023
Ending Balance: loans acquired with deteriorated credit quality	$	-		$	-	$	-		$	-		$	-		$	-

Loans:
Ending Balance: individually evaluated for impairment	$	-		$	-	$	-		$	-		$	-		$	-
Ending Balance: collectively evaluated for impairment	$	478,389		$	68,344	$	818,394		$	86,920		$	339,895		$	1,791,942
Ending Balance: loans acquired with deteriorated credit quality	$	1,838		$	1,292	$	19,523		$	-		$	5,908		$	28,561

	For the three months ended December 31, 2018
	Residential			Construction			Commercial
(dollars in thousands)	Real Estate			Real Estate			Real Estate			Consumer			Commercial			Total
Allowance for loan losses:
Balance, beginning of period	$	3,349		$	1,293		$	8,733		$	981		$	4,434		$	18,790
Provision charged to expense		293			(102	)		284			(11	)		(150	)		314
Losses charged off		(9	)		-			(25	)		(3	)		(47	)		(84	)
Recoveries		-			-			3			-			-			3
Balance, end of period	$	3,633		$	1,191		$	8,995		$	967		$	4,237		$	19,023

	At period end and for the six months ended December 31, 2017
	Residential			Construction			Commercial
(dollars in thousands)	Real Estate			Real Estate			Real Estate			Consumer			Commercial			Total
Allowance for loan losses:
Balance, beginning of period	$	3,230		$	964		$	7,068		$	757		$	3,519		$	15,538
Provision charged to expense		133			(78	)		1,271			125			60			1,511
Losses charged off		(78	)		-			(36	)		(58	)		(21	)		(193	)
Recoveries		1			-			-			4			6			11
Balance, end of period	$	3,286		$	886		$	8,303		$	828		$	3,564		$	16,867
Ending Balance: individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-		$	-
Ending Balance: collectively evaluated for impairment	$	3,286		$	886		$	8,303		$	828		$	3,564		$	16,867
Ending Balance: loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

	For the three months ended December 31, 2017
	Residential			Construction			Commercial
(dollars in thousands)	Real Estate			Real Estate			Real Estate			Consumer			Commercial			Total
Allowance for loan losses:
Balance, beginning of period	$	3,300		$	965		$	7,649		$	815		$	3,628		$	16,357
Provision charged to expense		40			(79	)		690			40			(49	)		642
Losses charged off		(55	)		-			(36	)		(28	)		(21	)		(140	)
Recoveries		1			-			-			1			6			8
Balance, end of period	$	3,286		$	886		$	8,303		$	828		$	3,564		$	16,867

	At June 30, 2018
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for loan losses:
Balance, end of period	$	3,226	$	1,097	$	8,793	$	902	$	4,196	$	18,214
Ending Balance: individually evaluated for impairment	$	-	$	-	$	399	$	-	$	351	$	750
Ending Balance: collectively evaluated for impairment	$	3,226	$	1,097	$	8,394	$	902	$	3,845	$	17,464
Ending Balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-

Loans:
Ending Balance: individually evaluated for impairment	$	-	$	-	$	660	$	-	$	580	$	1,240
Ending Balance: collectively evaluated for impairment	$	447,706	$	64,888	$	696,377	$	78,571	$	278,241	$	1,565,783
Ending Balance: loans acquired with deteriorated credit quality	$	3,213	$	1,297	$	7,610	$	-	$	2,451	$	14,571

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when an amount is determined to be uncollectible, based on management’s analysis of expected cash flow (for non-collateral-dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

Under the Company’s methodology, loans are first segmented into 1) those comprising large groups of smaller-balance homogeneous loans, including single-family mortgages and installment loans, which are collectively evaluated for impairment, and 2) all other loans which are individually evaluated. Those loans in the second category are further segmented utilizing a defined grading system which involves categorizing loans by severity of risk based on conditions that may affect the ability of the borrowers to repay their debt, such as current financial information, collateral valuations, historical payment experience, credit documentation, public information, and current trends. The loans subject to credit classification represent the portion of the portfolio subject to the greatest credit risk and where adjustments to the allowance for losses on loans as a result of provision and charge offs are most likely to have a significant impact on operations.

A periodic review of selected credits (based on loan size and type) is conducted to identify loans with heightened risk or probable losses and to assign risk grades. The primary responsibility for this review rests with loan administration personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by the Company’s internal audit function and applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit represents a probable loss or risk that should be recognized.

A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be able to be collected when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, individual consumer and residential loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The general component covers non-impaired loans and is based on quantitative and qualitative factors. The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.

Included in the Company’s loan portfolio are certain loans accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.

The following tables present the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and payment activity as of December 31 and June 30, 2018. These tables include purchased credit impaired loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:

	December 31, 2018
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial
Pass	$	473,542	$	69,458	$	792,781	$	86,657	$	335,764
Watch		715		-		28,344		81		4,012
Special Mention		-		-		32		27		-
Substandard		5,970		178		16,719		150		5,425
Doubtful		-		-		41		5		602
Total	$	480,227	$	69,636	$	837,917	$	86,920	$	345,803

	June 30, 2018
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial
Pass	$	443,916	$	66,160	$	691,188	$	78,377	$	277,568
Watch		1,566		-		7,004		111		374
Special Mention		75		-		926		27		69
Substandard		5,362		25		4,869		56		2,079
Doubtful		-		-		660		-		1,182
Total	$	450,919	$	66,185	$	704,647	$	78,571	$	281,272

The above amounts include purchased credit impaired loans. At December 31, 2018, purchased credited impaired loans comprised $7.1 million of credits rated “Pass”; $10.3 million of credits rated “Watch”; none rated “Special Mention”; $11.2 million of credits rated “Substandard”; and none rated “Doubtful”. At June 30, 2018, purchased credit impaired loans accounted for $7.8 million of credits rated “Pass”; $3.1 million of credits rated “Watch”; none rated “Special Mention”; $3.7 million of credits rated “Substandard”; and none rated “Doubtful”.

Credit Quality Indicators. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination, and is updated on a quarterly basis for loans risk rated Special Mention, Substandard, or Doubtful. In addition, lending relationships of $1 million or more, exclusive of any consumer or owner-occupied residential loan, are subject to an annual credit analysis which is prepared by the loan administration department and presented to a loan committee with appropriate lending authority. A sample of lending relationships in excess of $2.5 million are subject to an independent loan review annually, in order to verify risk ratings. The Company uses the following definitions for risk ratings:

Watch – Loans classified as watch exhibit weaknesses that require more than usual monitoring. Issues may include deteriorating financial condition, payments made after due date but within 30 days, adverse industry conditions or management problems.

Special Mention – Loans classified as special mention exhibit signs of further deterioration but still generally make payments within 30 days. This is a transitional rating and loans should typically not be rated Special Mention for more than 12 months

Substandard – Loans classified as substandard possess weaknesses that jeopardize the ultimate collection of the principal and interest outstanding. These loans exhibit continued financial losses, ongoing delinquency, overall poor financial condition, and insufficient collateral. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses of substandard loans, and have deteriorated to the level that there is a high probability of substantial loss.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.

The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of December 31 and June 30, 2018. These tables include purchased credit impaired loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:

	December 31, 2018
					Greater Than								Greater Than 90
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		Days Past Due
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Receivable		and Accruing
Real Estate Loans:
Residential	$	1,140	$	1,555	$	3,732	$	6,427	$	473,800	$	480,227	$	-
Construction		-		-		-		-		69,636		69,636		-
Commercial		2,382		1,616		6,163		10,161		827,756		837,917		-
Consumer loans		571		46		278		895		86,025		86,920		-
Commercial loans		1,237		105		2,222		3,564		342,239		345,803		-
Total loans	$	5,330	$	3,322	$	12,395	$	21,047	$	1,799,456	$	1,820,503	$	-

June 30, 2018

Greater Than

Greater Than 90

30-59 Days

60-89 Days

90 Days

Total

Total Loans

Days Past Due

(dollars in thousands)

Past Due

Current<

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$35.19	9	$328

10-Q	2018-12-31	Quarter: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-K	2018-06-30	Annual: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-Q	2017-12-31	Quarter: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-K	2017-06-30	Annual: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-Q	2016-12-31	Quarter: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-K	2016-06-30	Annual: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-Q	2015-12-31	Quarter: 2015-12-31

8-K	2019-01-22	Earnings, Exhibits
8-K	2019-01-22	Earnings, Exhibits
8-K	2019-01-15	Other Events
8-K	2018-11-28	Other Events
8-K	2018-11-21	Other Events, Exhibits
8-K	2018-11-07	Amend Bylaw, Exhibits
8-K	2018-11-06	Regulation FD
8-K	2018-10-29	Shareholder Vote
8-K	2018-10-22	Earnings, Exhibits
8-K	2018-10-19	Other Events
8-K	2018-07-31	Regulation FD
8-K	2018-07-23	Earnings, Exhibits
8-K	2018-07-17	Other Events
8-K	2018-06-12	Enter Agreement, Officers, Other Events, Exhibits
8-K	2018-04-23	Earnings, Exhibits
8-K	2018-04-17	Other Events
8-K	2018-03-06	Regulation FD
8-K	2018-02-23	Other Events, Exhibits
8-K	2018-01-22	Earnings, Exhibits
8-K	2018-01-18	Other Events

HFWA	Heritage Financial
UBNK	United Financial Bancorp
GCBC	Greene County Bancorp
TSBK	Timberland Bancorp
FSBW	FS Bancorp
ESSA	Essa Bancorp
FNWB	First Northwest Bancorp
PBIP	Prudential Bancorp
WEBK	Wellesley Bancorp
WVFC	WVS Financial

EX-31.1	ex311.htm
EX-31.1	ex312.htm
EX-32	ex32.htm